More International Bridges

MR. GRIFFIN: Members and guests of The Empire Club of Canada: On the 17th day of May in the year of Our Lord 1792 a group of New York merchants came to the decision to meet daily thereafter at regular hours to buy and sell securities beneath an old buttonwood tree in Wall Street. What they established was, in effect, a trading post, little different in practice from the trading posts which the Honourable Company operated in Rupert's Land at that very moment. The old buttonwood tree is gone and in its place stands the New York Stock Exchange which last year traded over half a billion shares with a value of more than fourteen billions of dollars. Between these two poles lies the story of the exploration and development of a great nation whose industrial capacity is one of the wonders of the world. The President of this great trading post is a young man of forty three-our speaker of today. George Keith Funston was born in Iowa, received his early education in South Dakota, his undergraduate schooling in Connecticut, his career training in Massachusetts, served his country in the District of Columbia and has achieved his greatest success in the State of New York. He got around. Mr. Funston was graduated with honours from Trinity College, Hartford, Connecticut in 1932 and cum laude from the Harvard School of Business Administration in 1934. In 1941, following several years experience as a senior executive in American Industry, he was appointed special assistant to Donald M. Nelson, the Chairman of the War Production Board. In 1944 at the age of thirty-three he became President of his Alma Mater, Trinity College in Hartford. Seven years later he resigned his post at Trinity along with Directorships in seven of America's greatest corporations and set up shop under the old buttonwood tree. At the age of forty-one he was President of that mighty trading post, the New York Stock Exchange. Mr. Funston is a Trustee of Trinity College and of a number of leading philanthropic institutions, a Vestryman of the famous Trinity Church in New York City and for the current year he is general chairman of the Greater New York Fund Campaign. Mr. Funston was in Toronto a few months ago at the time of the centenary of the Toronto Stock Exchange, which in its own way isn't doing too badly either. It is a pleasure to present him to a Toronto audience again.

MR. FUNSTON: It is a very real privilege to talk before the Empire Club. I am greatly honored to be here. Just a short while ago it was my pleasure to visit Toronto in connection with the celebration of the 100th anniversary of your Stock Exchange. At that time I met many of your financial and business leaders who gave me a taste of Canadian hospitality. Revisiting Toronto is thus an enjoyable and stimulating experience.

I'd like to talk over with you some problems concerning the employment of capital in. national and international channels--employment in such a manner as to secure the greatest benefit for each country and for each individual concerned.

Such benefits, of course, are social and political as well as economic--if, indeed, the three areas can be separated. These are problems which are not indigenous to Canada or to the United States. They are global in scope and upon their successful solution hinges the economic health and political sanity of the whole world. It seems to me that our countries have come closer to a workable solution of the investment problem than any other nations--certainly than any other team of nations. Each country has been fortunate in having been endowed with bountiful natural resources. But there are other factors which are even more important--an intense love of freedom and the will to fight to preserve our freedom, the imagination of peoples who have the courage and daring to risk in the hope of gain, the faith of peoples who believe in their own future.

I don't mean to imply that our two countries already have established political and economic utopias and that now we can afford to sit back and let nature take its course. I do say that we have established a sound working relationship which can still be greatly improved--but which even now we may commend to the rest of the world for its information and benefit.

Canada seems to be telescoping into a handful of years what it took the United States decades to accomplish: you are building a great manufacturing plant to complement your achievements as an agricultural nation, as a trading nation, and as a producer and processor of raw materials.

The success of your efforts has been--to put it mildly--sensational. And not the least extraordinary phase of your rapid growth is the financial solidity on which it is based. The United States today has an investment surplus--we have been an exporter of capital for some thirty-odd years--but it took a century of growth to reach that position. I was really astonished, in all frankness, to learn that Canada, while consuming huge amounts of money in the post-war growth period, has also been in several recent years an exporter of capital.

Just as astonishing to me is the relatively small contribution which foreign capital has made to your postwar growth. While United States investors, individual and corporate, have been privileged to put to work a substantial amount of money in Canada, most of your expansion has been financed by capital created by your own efforts. The United States has not been exactly an economic laggard in recent years but you have outdistanced us in the percentage of your national product which you have reinvested for the creation of new wealth.

While the amount of United States capital employed in Canada is small in relation to your own investments, the total nevertheless is large and increasing. At the end of 1951 total foreign investments in your country were $9 1/2 billions; of this United States investors supplied $71/4 billions.

In 1951 Canadian companies paid out to United States share owners $284 millions in dividends; in the past ten years those dividend payments have added up to almost $2 billion.

These figures have much more than a mere dollar-and-cents significance. We are allowed by you to invest in Canada, to share in your future, just about as easily as I might drive across the International Bridge. And the Canadian investor who wants to own a share in a United States company can invest his money with the same ease that he can buy a share of a Canadian enterprise.

This flow of capital, I need hardly say, is not all from South to North. As I have already pointed out, the interest of United States investors in Canada's spectacular growth is intense--but the per capita Canadian investment in the United States is larger than the per capita United States investment in Canada and has been larger for some time. The latest available figures showed that, on average, each Canadian citizen had a per capita United States investment of $84 while every United States citizen had a Canadian investment of $39.

Surely here is a magnificent example of international trust, respect and confidence. I hope that relationship flourishes for as long as our two countries have a common border.

Does anybody consider this unimpeded flow of capital an encroachment on the sovereign rights of the United States or Canada? I think not. Rather, it is an economic pattern which I suspect some day will prevail among all civilized countries, once they learn that political freedom and economic freedom walk hand in hand. It is a pattern symbolized by the International Bridge connecting our two countries across the St. Lawrence. Eventually many such international bridges-bridges to accommodate the free flow of private capital-will stretch from Canada and the United States across the seven seas to Europe, Africa, South America, the Near and Far Easts.

Whether the investment is national or international, the core of the investment process is the securities market. On stock exchanges in Toronto, Montreal, New York, London, Tokyo, minute by minute and day by day, the immediate worth of hundreds of billions of dollars of corporate property is constantly and publicly measured. It is in such markets that the seller of securities can always find a buyer, the buyer can always find a seller.

Securities exchanges are not mechanical devices imposed upon an economy at the whim of a group of brokers. They are an integral part of the capitalistic system without which that economy cannot function.

In the words of John B. Braithwaite, Chairman of the London Stock Exchange, who visited the Toronto Stock Exchange last Fall, "The Stock Exchanges of the world are the ball-bearings upon which the wheels of industry and finance revolve."

The roots of the New York Stock Exchange go back to the days when an infant nation was struggling to its feet. One of the first acts of George Washington's government was to consolidate the national debt, which amounted then to a staggering $80 millions. People were willing to buy the bonds of the new government-but, at the same time, they wanted some means of quickly exchanging those securities for cash. The New York Stock Exchange was developed to meet this need.

One hundred and sixty years later our Exchange--like its Toronto counterpart--exists for exactly the same reason. The investor in the United States or Canada is willing today to put his savings to work in industry mainly because of the existence of our national market places. He knows that he can sell his shares at a fair price five minutes after he has bought them.

The value of stock exchanges is not limited to their immediate and direct importance as market places. A capitalistic economy will stagnate unless great sums of money are constantly pumped through the system--money for growth, for the development of new products, new industries. And without a healthy securities market the raising of new funds by equity financing is all but impossible.

An unhealthy market for securities is rightly regarded by businessmen everywhere as a danger signal, a signal that the complex mechanism of the economy needs inspection and perhaps repair. For it is the stock exchange which provides the machinery to spread the ownership of industry throughout our lands.

And it is on our exchanges that the close mesh between the economic interests of our two countries is clearly expressed. On our market place are traded the shares of your mining, railway and distilling industries. On the Toronto Exchange you have United States chemical, shipbuilding, automotive and food shares, to mention only a few.

At a recent date United States issues listed on the Toronto Exchange had a market value of $7.6 billions, or 17.6 per cent of the market value of all the 1,012 issues listed here. The market value of all Canadian issues listed on the New York Stock Exchange totaled $2.2 billions.

Actually, and this may sound paradoxical, when an investor in my country buys a share in a United States industrial corporation, the chances are about one out of three that the company he selects is also engaged in a Canadian operation., In other words, out of the 800 or so industrial companies listed on the New York Stock Exchange, some 330 are an immediate part of the Canadian economy. And over 445 of those 800-odd companies, or 54 percent, have investments somewhere outside of the United States, in Canada or the rest of the world.

It is no accident that capitalism flourishes in the United States and Canada to a degree unknown elsewhere in the world; for it is in our two countries that the importance of the freedom of capital to work where it pleases is understood and respected. Nor is it an accident that Canada and the United States present a solid ideological front to the menace of world communism. Each of us has a deep and abiding respect for the rights and sanctity of the individual, a concept which has flourished in our North American capitalistic society.

Our mobility of capital has produced a condition of daily life which is abhorrent to Russian theorists still obsessed with the outworn theory that capitalism inevitably produces a disenfranchised proletariat. In the United States we have some 6,500,000 people who have a direct ownership interest in publicly owned corporations and another 2,000,000 people who own shares only in privately held corporations.

I would like to see the number of owners in the United States doubled-and then doubled again and again until every family has an ownership interest in our productive wealth. That is my idea of a democratic capitalism.

Perhaps the best way to emphasize the need for spreading share ownership is to point out that our industries, just as yours, need billions of dollars to make further growth possible. We cannot depend, as we did decades ago, on the wealthy to supply these funds; in the United States, for example, 100,000 millionaires, if there were that fantastic number, could not buy our publicly owned businesses. Nor do we want our businesses to borrow themselves into oblivion. We know that we can rely only to a limited degree on the reinvested earnings of our prosperous corporations. The only answer, the answer on which the vitality of our productive capitalism depends, is a wider stream of equity capital, the constructive employment of the mass savings of our peoples.

I think you might be interested in a recent series of articles in the London Economist, a publication not given to airy dreaming. The first article, intriguingly titled "Corpse in the Capital Market" presented statistical evidence to support the argument that in England the private investor, as we used to know him, is dead--"crushed to death by high taxation and rising prices."

"In the next few years," the Economist said, "the plight of the market for risk capital must be expected to grow at once more serious and more obvious."

The writer said there appeared to be only one realistic answer, "unless indeed the capitalist system as it has been known is to wither and die . . . ."

"If private industry and the Stock Exchange are to revive," the article concluded, "they must devise between them new ways of inducing broader masses of the population to come down and play their part in Throgmorton Street."

That is England's problem, that is your problem, that is our problem-employment of the mass savings of the people.

The next Economist article, "Shares for Sale," was just as incisive in its observations.

"The City and the Stock Exchange," the writer said, "have sat uncomfortably on the defensive and have done nothing to explain to a wide public that the dearth of investment in risk capital is a major threat to Britain's industrial future-and hence to the nation's standard of life.

"If a new generation is to be induced to invest in industry, a programme of active publicity will be the first need. It will have to set men arguing over their pints, and women over their teacups, whether they are concerned with the disappearance of savings and the imminent disappearance of a dynamic industry in Britain. It must demonstrate that an active stock exchange is the indispensable pipeline through which savings must flow to secure the replenishment of industry."

I know there's no need for me to tell you of the work that D'Arcy Doherty, A. J. Trebilcock and Jack Rattray are doing here in Toronto on that score. Perhaps, however, you might be interested in a thumbnail sketch of what we are trying to do at the New York Stock Exchange to tell people about the risks and benefit of share ownership and to spread share ownership over as wide an area as possible.

Our basic policy revolves around this objective: Public ownership of the means of production. I'm sure I don't have to clarify that statement by saying that public ownership does not mean government ownership.

We have made good progress in recent years. In three recent post-war years, to illustrate, some 1,300,000 people became share owners for the first time. But our final goal is still far, far in the future.

Last year, to help us reach our objective, we undertook a number of studies and surveys to get fundamental information about our industry. The Brookings Institute Survey of Share Ownership in the United States was such a document, for it has filled a deep gap in our knowledge of the economy.

Only recently we finished a broad analysis of the efficiency of our operations in terms of Federal tax policy and securities regulations. In addition we have dissected our costs of operation, the prices we charge, our methods of selling. We have in progress the most intensive survey of our merchandising problems ever undertaken. We have tried to find out all we can about the people who own securities-and, above all, the people who don't own securities. This extensive search for facts to serve as the basis for action is grounded on the simple premise that we can't wait for the public to beat a path to our doors--we've got to tell them why it's to their advantage to see what investment offers them, and to point out how easy it is to become a shareowner.

Our stock exchanges, of course, have a concurrent responsibility to insure that the investor, whether he is a citizen of Canada or the United States, is given the most honest and efficient service possible. A striking example of international co-operation with this objective in mind was provided last year when our two governments acted in concert to protect investors against the so-called moose pasture salesman, the salesman whose main aim in life appears to be to sell worthless securities to the gullible.

It seems to me that even closer co-operation between our two countries is inevitable as the tide of growth surges here in the North. I have in mind such projects as the $63 million expansion programme of the Steel Company of Canada at Hamilton; Consolidated Mining's $60 million expansion at Trail; the $41 million development of Sherritt-Gordon Mines at Lynn Lake; the $200 million operation of Iron Ore Company of Canada on the LabradorQuebec border; Canadian Chemical Company's $55 million petrochemical plant near Edmonton; the vast half a billion dollar power-aluminum project of Aluminum Company of Canada at Kitimat.

I mention the amount of money involved in each of these projects not only because the investments themselves are huge but also because they must fade away before the even larger investments which these projects will create. They are merely the start in a dynamic cycle of growth. In each of our countries today there are whole industries which were undreamed of a generation ago-television, antibiotics, third-dimension motion pictures, jet planes, atomic submarines, and synthetic fabrics. These are exciting words today. But how long will it be before they are part of the past, the page of progress having turned to make way for industries which have not yet been conceived.

From 1946 through 1952 inclusive, industry in the United States has spent $151 billions on new plant and equipment. This year it is estimated that $27 billions will be spent for this purpose.

A great part of the billions of dollars the industries of our two nations will need must come from individual investors. Obviously it is our obligation and responsibility to do everything possible to create a healthy investment atmosphere so that the needed sums will be forthcoming.

Our problem today is not only to improve our present way of doing business. We must fight, and fight desperately, to preserve the gains we have achieved. Our societies, our economies, are under constant and diabolically skillful attack from the totalitarian states; and even from misguided or misinformed groups within our own ranks.

You in Canada, we in the United States, and the other free nations of the world must do more than merely resist these attacks. We must be aggressive and carry the fight to the others. We must take the initiative at home and abroad.

One of the most important and pressing tasks before us is the restoration of private overseas investment to its traditional, its essential, position in world affairs.

Since World War II the United States has exported through governmental channels some $38 billions in the form of military and economic aid. In contrast private foreign investments during the same period totaled around $7.7 billions.

Canada's contribution to world recovery and mutual defense since the War amounts to around $2.5 billions. Canada's private investment abroad during these years comes to about one-quarter billion dollars.

These governmental grants and loans have been vital to world recovery but admittedly they were stop-gaps, not too much admired by the giver or by the receiver. It is high time, in my opinion, that government back out of the foreign investment scene and high time that the private investor step in.

But the private investor cannot be just tolerated-he must be invited and welcomed.

To encourage the international flow of private capital, three things are necessary, therefore.

First, governments of those nations seeking capital must take a fresh, hard look at such deterrents to investment as export or import quotas, limitation on remittance of profits, control of capital movements, multiple exchange rates, fear of nationalization or expropriation, special taxation of foreign enterprises, undeveloped banking facilities, inability to deal with responsible government officials, required local participation, discriminatory enforcement of tax laws, and requirements for the reinvestment of earnings.

It is encouraging to note from frequent references in the daily press that the governments of free nations are studying these questions intensely. It is to be hoped that some tangible results will soon follow.

I'd like to mention in passing an unfortunate example of international action which must be corrected. The General Assembly of the United Nations last December passed the so-called Nationalization Resolution by a vote of 36 to 4, with 20 abstensions. The Resolution purported to be a declaration aimed at asserting the sovereign rights of nations but at the same time speeding and safeguarding international investment. The Resolution recognized the right of a nation to nationalize its resources, then topped off this announcement of the obvious by strangely failing to mention prompt compensation in the event of expropriation.

Curiously, too, many capital-poor nations--nations which claim they are anxious to encourage foreign investment in their countries--joined the Soviet bloc in approving the Resolution. Only the United States, the Union of South Africa, New Zealand, and the United Kingdom of Great Britain and Northern Ireland opposed this travesty.

Among the nations who declined to vote yes or no was Canada--for reasons which I suppose were defensible but which, nevertheless, negated an opportunity to go down the line for private investment. I do believe, though, that the business communities of our two countries regret the damage that has been done by an international body to the revival of private international investment-and that we shall make clear our views to our representatives in the United Nations organization.

Second, our two governments and those of other capital exporting nations have their own job to do to facilitate the flow of capital. In the United States, for example, we must modify the capital gains tax and double taxation of dividends. We must work towards the elimination of international double taxation; extension of reciprocal tax treaties; the establishment of uniform securities legislation and reciprocal securities treaties.

Your own government has been a leader in this areayou do not have a capital gains tax and you have made a start toward the eventual elimination of double taxation of dividends, to mention two points. And I have reason to believe that our present administration in Washington is aware of the importance of private investment overseas and is actively studying ways and means of encouraging its flow.

President Eisenhower has named Lewis W. Douglas, our former Ambassador to Great Britain and at one time Chancellor of McGill University, to head a group to study our foreign economic policies with a view to recommending changes designed to strengthen the free world.

Thirdly, cur stock exchanges, our industries, our business organizations, and our financial communities should establish closer working relations with each other to speed a return to normalcy in international finance. Stock exchanges and financial communities can do a great deal themselves to facilitate two-way international investment by developing more uniform methods, terminology and technical procedures for securities transactions to bridge the gaps of language and custom that exist between our countries and the rest of the world. For example, investors in the United States and Canada are accustomed to stock certificates in registered form and to receive their dividends, proxies, and other rights directly from the company, whereas in many foreign countries shares are transferred in the form of bearer certificates, with coupons which must be deposited for dividends or other benefits. North American stockholders expect full disclosure of the financial condition and results of operations of their companies. They also expect full voting rights. Many foreign concerns still have far to go to meet the standard which our North American stock exchanges have developed and which our investors expect as a matter of course. We must also work together to create a better public understanding of the function of free enterprise and the private investor.

I would like to see the investor of tomorrow offered the same international investment fare which he enjoyed before the Doctrine of State Control strangulated the arteries of trade, commerce and investment. The North American investor today has that freedom and range of choice--he can invest his funds in the industries of Canada or the United States with equal ease. But I would like to see traded on your Exchanges and mine the securities of enterprises in all the nations of the world-just so long as those nations welcome the flow of international capital and respect the rights of the investor.

But while we are holding up this bright future and striving towards its realization. We must continue to work together to improve even more the magnificent co-operative relationships and undertakings which Canada and the United States have already achieved. To such expanding business and financial co-operation with Canada, I pledge you the continuing interest and support of the New York Stock Exchange.

THANKS OF THE MEETING were expressed by Mr. D. H. Gibson, C.B.E.